OPPORTUNITY AND OBSTACLES OF BLOCKCHAIN IN MORTGAGE SERVICING


What is blockchain all about? The confusion is growing thick day by day. Before we start with blockchain technology, it is important for you to understand the comparison between the centralized ledger and decentralized ledger. Centralized ledger is controlled by a designated person, here any data modification by the authorized team members will reflect throughout the systems linked to it. So, the data exposed can be corrupted or destroyed. Whereas, in decentralized ledger the data shared is synchronized and acknowledged across the network. Here, independent systems are used and not centrally controlled, thus it drastically minimizes the cost of trust ensuring the data remains secure.

As we know, in any organizations the systems are connected forming a network chain. Now, every system has different recording and controlling option. In centralized system the systems are connected to a single database and controlled from a single point, here a user is authorized to view any transactions taking place within the network. Whereas in decentralized system, the database is not only shared but also synchronized and replicated among the users of the same network.

This technology initially offered the option to monitor and record decentralized database also known as distributed ledger. Here, a single block captures a new transaction further adding it to the previous block, thus creating a blockchain. With remote network access, all members of the group can view the block where the transactions are recorded in real-time. As a matter of fact, these transactions are tamper-proof only if the terms are agreed and scripted into the ledger, as a single transaction block is linked to the previous block.

So, we are clear about how a blockchain is created and how it works. Now the question is how does this benefits mortgage servicing? Let me tell you a story about the weight of a glass, a psychologist in her therapy session asked her patient to lift the glass of water. The patient lifted the glass with a smile, the psychologist asked, ‘how heavy is this glass of water you’re holding?’. She replied, ‘maybe eight to ten ounces’. The psychologist replied, ‘From my perspective, the weight of this glass doesn’t matter, it depends on how long you are holding it. The longer you hold the heavier it feels.’ Once she agreed, the psychologist continued, ‘if you hold the glass throughout the day, your hand will be numb, and you cannot do anything until you drop that glass’. The moral of the story is to let go stress and lessen the burden you carry.

Take a moment and recollect, if you can track real-time transactions, along with complete data in a secured network, how easy things could be. These are the basic requirements of a mortgage servicing and lending industry. There are significant risks when it comes to mortgage servicing processes and lesser levels of trust starting from origination to servicing of a loan. We need to observe and seize the approach that not only reduces risk but at the same time enhance the trust level.

Benefits of blockchain for mortgage industry:

Blockchain can define and format the component like smart contracts, distributed ledgers, inherent security, digital payments and this can contribute in adding transparency as well as efficiency to standardize the workflow of servicing industry.

Distributed Ledgers:

The blockchain technology basically uses a decentralized database also known as distributed ledgers. In an ordinary situation here one party records the data on a centralized ledger, now the data automatically gets stored on the public blockchain that provides multiple ways of validating the transaction.

We usually create a distributor data for recording data like deeds, real-estate titles, planning permissions and other data related to mortgage servicing industry. Now, blockchain technology permits shared control of data, to be precise remote access is granted to the specific controller who can modify or adjunct the data and further control the authorization. This network is disseminated across the numerous systems; thus, creating a virtually sturdy chain of indemnity, against falsification of transactions and accelerating the collection of relevant data simply the maximizing the ledger’s availability and accessibility.

The designated user validates the transaction as the process is digitized. So, they are able to enhance the transparency compliance and audit necessities. Here, the lenders and banks get a clarity of the lending processes; which includes the parties, the user controlling the authoritative copy of the digital assets along with the owner’s assets.

Smart Contracts

Self-executing contracts are also known as smart contracts. This bridges the gap between an intermediary and helps to exchange data in a secure and transparent way. This concept follows the same principles of a vending machine with other required data (digitized mortgage documentation) provided on the attainment of the stated terms. You should understand the smart contracts operates on an ‘if-then’ format, so this sates the penalties and the obligation around the contract does also enforce the same.

To digitized mortgage documents for storage and tracking, decentralized ledger can be used for smart contracts. The network of computers that run the blockchain technology will naturally result in ledger feedback like the automated mortgage payments. In turn, you will notice a substantial drop in processing time and operational cost.

Inherent Security

The entire cycle of origination to the fulfilment of a loan is vulnerable to risk, as numerous contracts and data are linked to it. Even today, relying on paper like mortgage notes are still prevailing, the value recedes if it is lost. To maintain the integrity of the loan and the data linked to it, the electronic loan documents also require inspection. An intrinsic layer of security is created by the distribution of a network (blockchain) across the multiple systems. This makes it challenging to falsify any transactions. As we mentioned earlier that a transaction block is linked to their previous transaction; so, once the terms are agreed and scripted to the ledger it is impossible to tamper. Here the cryptography verifies and authenticates the transaction, thereby maintaining privacy. Any designated user can access the ledger but only the ones relevant to his department.

Digital payments

Did you know blockchains technology was initially digital currency centric, Bitcoin remains intrinsic to it features. This technology automates the exchange of digital payments specific to digital assets like property titles in an integrated pattern. It is possible even without any intervention of legal representative or notary. Although this technology is yet to conquer the financial firms if followed things do have better perspectives.

Technical obstacles

Well, we all know this mortgage servicing industry is reluctant to embrace new innovation at the early stage. In course of time, it will take multiple implementations before being adopted.

All said and done, everything technology has its own perks and challenges. One should overcome the technicalities before it is accepted in this industry.

  • Open distributed ledger invites significant data privacy risks. Calculative integration is required to reduce the trade-off between trust, efficiency and privacy.
  • With private blockchain, security remains a major concern. As any modification made to the database, it is automatically received by all user. This automation ensures that the transaction recorded is secured. So, when every user gets a copy of the data, the integrity of the database is compromised. In this situation, it is unlikely to withstand hacks on any users.
  • Uncertain compliance and regulatory hangs over this technology. The US federal till date did not regulate this technology to the segregation of states. In such a situation a state may introduce their own terms. Till now, Vermont accepts blockchain for evidence; Arizona embraced the smart contracts, Chicago is running a pilot project on real-estate records etc.

Despite these technical obstacles, the future of blockchain in this mortgage servicing industry seems inevitable. The efficiency, transparency, and security benefits of deploying this technology predicts it will play an integral role. Then again, if you are looking to adopt this technology it’s quite early to do so, till then try outsourcing mortgage servicing solution.

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